7 COMMON MISTAKES MADE BY INVESTORS

7 Common Mistakes Made By Investors

Posted on 13/09/2016

Property investment is both Australia’s favourite way to create wealth and our most common way to lose money. Award-winning buyers’ agent and best-selling author Miriam Sandkuhler says too many investors have negative outcomes because they make common mistakes.

Sandkuhler’s book Property Prosperity and her recent webinar presentation hosted by hotspotting.com.au were motivated by a desire to help property buyers create positive outcomes by avoiding those mistakes.

“I do what I do because I don’t want investors to suffer,” she says. “I wrote my book after seeing too many people make poor investment decisions, costing them tens of thousands of dollars. Most investors have only one chance to get it right.”

She says buyers are susceptible to many pitfalls in the property market, including:-

making hasty decisions because they are time-poor;

thinking they can transfer their professional skills to property investing;

believing that all properties are good investments;

falling prey to the tactics of spruikers and developers;

taking bad advice from professionals who receive kickbacks from developers;

being duped by agents’ under-quoting tactics; and

paying too much for property through inexperience with negotiation.

She says poor asset selection arising from a bad underlying strategy – or the absence of any kind of strategy - can result in an investment that loses money.

She cites the example of a couple aged over 50 with a low-risk profile who opted for a relatively high-risk strategy, buying a small inner-city apartment off the plan. The property made cash losses and also made a capital loss when it was sold (bought for $410,000 in 2010 and sold for $355,000 in 2015).

Another investor with a more sensible strategy bought a house in a quality suburb with good infrastructure and watched its value rise from $760,000 to $975,000 in less than two years.

In her webinar presentation, Sandkuhler outlined seven common mistakes made by property investors and ways to avoid them.

Mistake #1: Thinking that free advice is good advice

There’s plenty of advice for investors freely available, but at what cost?

Listening to the wrong people can lead to investment decisions that deliver poor capital growth, which hinders the future development of a property portfolio.

She says many buyers accept advice from agents who are paid to represent the seller and often receive advice that is biased and detrimental to their financial position.

If a professional service provider is giving advice but not charging a fee, someone else is paying them. Referrals provided from financial planners, accountants and mortgage brokers can be tainted because they may be receiving kickbacks from developers.

“They can make an enormous amount of money selling their clients down the river,” Sandkuhler says.

“Most people don’t know the difference between free advice and independent professional advice.”

Real estate consumers should remember that the industry is not regulated by ASIC and practitioners don’t need to be qualified to provide advice. The industry is rife with self-appointed experts, coaches, marketers and spruikers.

“It’s a case of Buyer Beware,” she says.

Mistake #2: Not understanding risk

There are two distinct types of risk in property investment: the investor’s personal risk profile and the property risk.

Many investors fail to consider or understand their risk profiles. An individual’s risk profile can be influenced by their age, family circumstances, financial situation and personality type. People with low-risk personal profiles should not invest in high-risk property.

In real estate investment, one size does not fit all. There are high-risk and low-risk opportunities in real estate. Buying apartments off the plan can be high-risk, because of the potential for the market to be over-supplied, developers or builders to go bust, or the construction phase to experience delays.

Mistake #3: Not having a documented strategy

Many investors don’t have clarity around their goals. They lack clear time frames and considered outcomes. They have not considered the impacts of their age, income, risk profile or risk appetite (their desire to buy property). Two people in a relationship may have different risk appetites (one wants to create a portfolio of 10 properties while the other is happy to buy only three properties).

Investors need to be clear about their strategy: for example, are they investing for capital growth or for cash flow? They need to make a decision on this issue, because it will influence the type of asset they buy.

“The approach of many people is based on the hope that it will all work out with time – and that’s a very risky way to determine the outcome,” says Sandkuhler.

Mistake #4: Not engaging experts

Investors need to engage qualified professionals at different stages of the process.

Initially investors should speak to their accountant or financial adviser, buyers’ agents, accountants and mortgage brokers. When going through the buying process, they will need to engage solicitors (or conveyancers), valuers, building inspectors and pest inspectors. Later, property managers, insurance brokers and quantity surveyors should be involved.

It’s false economy to avoid paying for quality advice and services - for example, building and pest inspections to ensure the target property does not have hidden problems.

“It never ceases to amaze me how many people don’t do this,” she says. “It’s better to spend $500 on inspectors than buy a lemon and have to spend $50,000 fixing problems.”

Mistake #5: Not doing adequate research

Most people think research is looking at realestate.com.au for properties to buy. “That’s searching, not researching,” Sandkuhler says.

Investors need to seek information on the target location, including population growth, employment opportunities, infrastructure, local amenities, the amount of stock on the market, and demand levels from home buyers, investors and tenants.

“Most people understand the importance of demand but they neglect the supply factor,” Sandkuhler says. “Many make the mistake of focusing on population growth alone.

“Others make a decision based on historic price growth performance, rather than current growth drivers.”

She points out that historic price performance changes over time. There is no guarantee the current market leader will be the best over the next five years. In 2010 Melbourne’s No.1 suburb on price growth was Beaumaris; in 2015 it was Ashwood and Beaumaris no longer featured among the city’s top performers.

Mistake #6: Not understanding the rules of purchasing

Failure or success often comes down to the negotiation. Buyers who don’t understand the use of under-quoting by selling agents or how to correctly appraise the value of a property can make costly mistakes.

“Most people don’t know how to formally present an offer to a selling agent,” she says. “If you don’t have a buying strategy in place, you can miss out on securing the property and you can end up paying too much for it.”

Sandkuhler says real estate can be regarded as “a game” and buyers need to either learn the rules or engage someone who understands them.

“Additionally, the rules of the game differ from state to state, so don’t make the mistake of thinking that each state is the same.”

Mistake #7: Not reviewing their portfolio

Investors need to regularly review the properties in their portfolio because situations can change over time.

“It’s important to treat property investment as a business and conduct regular reviews of performance,” she says.

“Many investors I come across have no real awareness about how their property has performed, let along what the opportunity for future growth is like.”

Markets can change and sometimes quite quickly. Employment opportunities in an area can change, infrastructure can change or a high level of new supply can distort the supply-demand balance – and these changes can work for or against the local property market.